Justice and Credit: Does Legal System Quality Enhance Financial Development?
DOI:
https://doi.org/10.63075/vkncbn26Abstract
A strong financial development depends on stable legal institutions. Most nations face challenges in developing deep credit markets which leads to questions about the role of inadequate legal systems. The research investigates the important relation between legal system quality and financial development by analyzing private sector credit as percentage of GDP. The objective of this study aims to identify which particular components within legal institutions enhance domestic credit levels for the private sector among rule of law, strength of legal rights, contract enforcement efficiency, judicial effectiveness, and corruption control. A fixed-effects regression analysis with 76 countries from 2013 to 2021 functioned to measure the influence of legal system elements on financial development. Stata software processed the data from World Bank resources along with their related credit and legal indicator collections. Experts assumed that institutional changes are genuinely reflected through improved legal indicators while a linear relationship properly describes the connection between law and finance. This research demonstrates that better legal rights for borrowers and lenders as well as faster judicial systems lead to major increases in private credit levels (Laeven & Levine, 2020; Djankov et al., 2021). Broad measures of rule of law and corruption perception fail to exhibit substantial direct impact on private credit once legal factors receive sufficient control. Previous studies confirm that financial credit growth stems from laws protecting both creditors and borrowers along with laws enforcing contractual agreements (Beck, Demirgüç-Kunt, & Levine, 2003; Haselmann, Pistor, & Vig, 2010). The panel results indicate that specific legal reforms create faster financial depth impacts than governance indicators which display slow changes (Berger & Udell, 2020). Data shows that particular legal framework improvements in creditor rights and judicial efficiency create significant financial development results. The research advocates for policymakers to direct their efforts toward these specific legal reforms because they represent a direct approach to increase credit market depth even though sustained rule-of-law development continues being an essential long-term objective.
